hr chapter11
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PART FOUR
Total Rewards
L EA R NING O U T CO M ES
AFTER STUDYING THIS CHAPTER.YOU SHOULD BE
ABLE TO
EXPLAIN the strategic importance of total
rewards.
EXPLAIN in detail each of the three stages in
establishing pay rates.
DISCUSS competency-based pay.
DESCRIBE the five basic elements of compen
sation for managers.
DEFINE pay equity and EXPLAIN its importance
today.
REQUIRED PROFESSIONAL CAPABILITIES (RPC)
Monitors the competitiveness
of the total compensation
strategy on an ongoing basis
Monitors the competitiveness
of the compensation pro
gram relative to comparable
organizations
Provides for delivery of payroll
services in compliance with
applicable legislation and
company policy and advises
the organization on related
matters
Ensures compliance with
legally required programs
Ensures accurate and timely
delivery of pay
Ensures pay records are
accurate and complete
Recommends job price and
pay ranges based on relevant
internal and external factors
Strategic Pay Plans
CHAPTER
11
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4 Part 4 Total Rewards
THE STRATEGIC IMPORTANCE OF TOTALEMPLOYMENT REWARDS
al employment rewards An
egrated package of all rewards
onetary and non-monetary,
trinsic and intrinsic) gained
employees arising from their
mployment.
Monitors the competitiveness of
he total compensation strategy
n an ongoing basis
Compensation and rewards management is extremely important to every
employee. Total employment rewards refer to an integrated package of all
rewards gained by employees arising from their employment. These rewardsencompass everything that employees value in the employment relationship.
There are a variety of models that attempt to define the elements of total
employee rewards. Some models segment rewards based on the monetary
(extrinsic), non monetary (intrinsic) divide, with further differentiation
between bash payments and benefits that have are a cash expense for the
organization, but are not paid as cash to the employees, as illustrated in
Figure 11.1.1
Alternatively, WorldatWork conceptualized the total rewards model within
three broad categories:
Compensation (extrinsic), benefits (extrinsic), and non-monetary rewards
(intrinsic). Recently, the work experience category was further refined by split-
ting it into three partsworklife programs, performance and recognition,
and development and career opportunitiesresulting in five categories of total
rewards, as shown in Figure 11.2.
The total rewards approach, as opposed to the previous approach of man-
aging different elements of compensation in isolation, has arisen from the
changing business environment of the last several decades. The economies
of developed nations like Canada have evolved from a largely industrial-
ized base to become far more virtual, knowledgebased, and servicebased,
where employees are increasingly regarded as drivers of productivity. A total
rewards approach considers individual reward components as part of an
integrated whole to determine the best mix of rewards that are aligned with
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Chapter 11 Strategic Pay Plans 295
FIGURE 11.2 The Total Rewards Model
BusinessEmployeeCompensation Attract
Motivate
RetainBenefits
Satisfaction
& EngagementPerformanc
& Results
Performance & Recognition
Development & CareerOpportunities
WorldatWork
rw Pffri 11Ihwitifct fm
WorldatWork Total Rewards Model
Strategies to Attract, Motivate and Retain Employees
OTAL REWARDS
STRATEGY
urce: Total Rewards: WorldatWork Introduces aNewView 2006.Reprinted with permission of WorldatWork, Scottsdale, AZ. www.worldatwork.org.
business strategy and that provide employee value, all within the cost con-
straints of the organization. Alignment is the extent to which rewards support
outcomes that are important to achieving the organizations strategic objec-
tives. For example, when competitive advantage relies on relentless customerservice, this behaviour should be reinforced. Employee value is created when
rewards are meaningful to employees and influence their affiliation with the
organization.2
The Five Components of Total Rewards
1. Compensation. This category includes direct financial payments in the form
of wages, salaries, incentives, commissions, and bonuses. Wages and salaries
are discussed in this chapter, and other direct financial payments are dis-
cussed in Chapter 12.
2. Benefits.This category includes indirect payments in the form of financial ben-
efits, like employerpaid insurance and vacations. It also includes employee
services, as discussed in Chapter 13.
3. Work-life programs. This category of rewards relates to programs that
help employees do their jobs effectively, such as flexible scheduling, tele-
commuting, childcare, and so on. Worklife programs are discussed in
Chapter 13.
4. Performance and recognition. This category includes payforperformance
and recognition programs. These programs are discussed in Chapter 12.
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6 Part 4 Total Rewards
5. Development and career opportunities. This category of rewards focuses
on planning for the advancement or change in responsibilities to best
suit individual skills, talents, and desires. Tuition assistance, professional
development, sabbaticals, coaching and mentoring opportunities, succes-
sion planning, and apprenticeships are all examples of careerenhancing
programs.
The worlds most admired companies excel at taking a total rewards approach,
as discussed in the Strategic HR box.
STRATEGIC HR
Rewards Program Effectiveness at the Worlds
Most Admired Companies
Every year, the world's most admired companies (MACs)
are featured in Fortune magazine. In 2009, these
companies excelled in six key areas related to reward
program effectiveness:
1. focusing on excellence in the execution of rewards
programs
2. ensuring their rewards programs are aligned with
organizational goals, strategy, and culture
3. promoting a total rewards view across the organiza
tion and effectively leveraging intangible rewards
4. having stronger programs for developing talent from
within, resulting in lower base salaries than that of
their peers
5. better leveraging their managers skills in rewards
program implementation
6. reinforcing HRs role in helping managers succeed at
putting reward programs into action
One key reason MACs are more successful at aligning
their rewards programs with their organizational goals
is that they tend to take a more global, centralized
approach to managing rewards strategy, compensation
structures, and performance management programs.
They also excel at communicating their business strat
egies to managers and employees. The emphasis on
communication also extends to the rewards arena.
MACs understand that employees are motivated by
much more than money. They are more likely to take
a total rewards approach, covering not just tangible
rewards like base salary, incentives, and other monetary
benefits, but also intangible rewards such as career-
growth opportunities, quality of work, recognition, and
work climate.
MACs generally pay lower base salaries than their
peers. On average, MACs pay approximately 5 percent
less in base pay for management and professional roles
than other organizations. This is most likely the result
of the emphasis that MACs place on intangible rewards
like career development. They have a stronger pool
of homegrown talent to choose from when job vacan
cies arise, so they are less reliant on hiring expensive
external talent.
Organizations tend to fuss and fret about the designof their rewards programs, but these companies exem
plify what research has indicated: Impressive design is
not why rewards programs generally work well. It is the
way they are put into action and then sustained by the
organization that drives their effectiveness.
Source: Adapted from T. McMullcn, M Royal, and VI. Stark,
RewardsProgram Effectiveness: What Makes the Worlds Most
Admired Companies Great? WorldatWork Journal, IS, no. 1,
pp. 6574. Contents 2009. Reprinted with permission from
WorldatWork. Content is licensed for use by purchaser only.
No part of this article may be reproduced, excerpted, or redis-
tributed in any form without express written permission from
WorldatWork.
wers Perrin (now known as
wers Watson)
ww.towerswatson.com
Impact of Rewards
The purposes of rewards are to attract, retain, motivate, and engage employees.
Engagement refers to a positive emotional connection to the employer and
a clear understanding of the strategic significance of the job, which resultsin discretionary effort on the part of the employee. The 2007-2008 Global
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Chapter 11 Strategic Pay Plans 297
Workforce Study by Towers Perrin (now known as Towers Watson) consultants
found that, for Canadians, competitive base pay was the number one factor in
attracting employees to an organization, having excellent career opportunities
was the most important factor in retaining employees, and senior managements
interest in employee wellbeing was the top factor influencing employee
engagement. Similarly, a study of 446 organizations across Canada by
Western Compensation and Benefits Consultants found that the most effectiveattraction strategy was offering competitive base salaries, and the top reason
for turnover among employees was dissatisfaction with cash compensation.
Opportunities for advancement, worklife balance programs, and competitive
benefits programs are also used by over 70 percent of Canadian companies to
attract talent.4
BASIC CONSIDERATIONS IN DETERMINING
AY RATESFour basic considerations influence the formulation of any pay plan: legal
requirements, union issues, compensation policy, and equity.
Hintsi TO ENSURE If GAL; COMPLIANCE
Legal Considerations in Compensation
All of the 14 jurisdictions regulating employment in Canada (ten provinces,
three territories, and the federal jurisdiction) have laws regulating compensation.
Thus, HR managers must pay careful attention to which legislation affects their
employees. Further, these laws are constantly changing and require continual
monitoring to ensure compliance. Legislation affecting compensation adminis-
tration is discussed below.
Employment/Labour Standards Acts (Canada Labour Code)
Employment/labour laws set minimum standards regarding pay, including mini-
mum wage, maximum hours of work, overtime pay, paid vacation, paid statu-
tory holidays, termination pay, record keeping of pay information, and more.
There are variations in some of the minimum standards for students, trainees,
domestics, nannies, seasonal agricultural workers, and others. Executive, admin-
istrative, and professional employees are generally exempt from the overtime
pay requirements.
Pay Equity Acts
Pay equity laws were enacted to address the historical undervaluation of
womens work by providing equal pay for work of equal (or comparable)
value performed by men and women. Employers are required to identify male
and femaledominated jobs, and then use a genderneutral job evaluation system
based on specific compensable factors (such as skill, effort, responsibility, and
working conditions) to evaluate thejobs. Pay for femaledominated jobs that are
equivalent in value to maledominated jobs must be increased to the pay level
of the comparable maledominated job. Not all Canadian jurisdictions have payequity laws, as will be discussed later in this chapter.
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8 Part 4 Total Rewards
Human Rights Acts
All jurisdictions have enacted human rights laws to protect Canadians from
discrimination on a number of grounds in employment and other areas. These
grounds differ somewhat among jurisdictions, but most prohibit discrimination
in employment (such as in compensation and promotion) on the basis of age,
sex, colour, race/ancestry/place of origin, religion/creed, marital/family status,
and physical or mental disability.
nsures compliance with legally
equired programs
sociation of Workers'
mpensation Boards of Canada
ww.awcbc.org
Canada/Quebec Pension Plan
All employees and their employers must contribute to the Canada/Quebec
Pension Plan throughout the employees working life. Pension benefits based on
the employees average earnings are paid during retirement. Details of these and
other benefits are provided in Chapter 13.
Other Legislation Affecting Compensation
Each province and territory, as well as the federal government, has its own
workers compensation laws. The objective of these laws is to provide a prompt,sure, and reasonable income to victims of workrelated accidents and illnesses.
The Employment Insurance Act is aimed at protecting Canadian workers from
total economic destitution in the event of employment termination that is beyond
their control. Employers and employees both contribute to the benefits provided
by this act. This act also provides up to 45 weeks of compensation for workers
unemployed through no fault of their own (depending on the unemployment
rate in the claimants region and other factors). Maternity leave, parental leave,
and compassionate care leave benefits are also provided under the Employment
Insurance Act.5
Union Influences on CompensationDecisions
Unions and labour relations laws also influence how
pay plans are designed. Historically, wage rates have
been the main issue in collective bargaining. However,
other issuesincluding time off with pay, income
security (for those in industries with periodic layoffs),
costofliving adjustments, and pensionsare also
important.6
The Canada Industrial Relations Board and similar
ork stoppages may reflect employee dissatisfaction with pay plans andbodies in each province and territory oversee employerher forms of compensation, such as pensions. practices and ensure that employees are treated in
accordance with their legal rights. Their decisions underscore the need to involve
union officials in developing the compensation package.
Research INSIGHT
Union Attitudes toward Compensation Decisions
Several classic studies shed light on union attitudes toward compensation plans
and on commonly held union fears.7 Many union leaders fear that any sys-
tem used to evaluate the worth of a job can become a tool for management
malpractice. They tend to believe that no one can judge the relative value of jobs
better than the workers themselves. In addition, they believe that managements
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Chapter 11 Strategic Pay Plans 299
usual method of using several compensable factors (like degree of responsibility)
to evaluate and rank the worth of jobs can be a manipulative device for restrict-
ing or lowering the pay of workers. One implication is that the best way in
which to gain the cooperation of union members in evaluating the worth of jobs
is to get their active involvement in this process and in assigning fair rates of pay
to these jobs. However, management has to ensure that its prerogativessuch
as the right to use the appropriate job evaluation technique to assess the relativeworth of jobsare not surrendered.
rovides for delivery of payroll
ervices in compliance with
pplicable legislation and
ompany policy and advises the
rganization on related matters
Compensation Policies
An employers compensation policies provide important guidelines regarding the
wages and benefits that it pays. A number of factors are taken into account when
developing a compensation policy, including whether the organization wants
to be a leader or a follower regarding pay, business strategy, and the cost of
different types of compensation. Important policies include the basis for salary
increases, promotion and demotion policies, overtime pay policy, and policies
regarding probationary pay and leaves for military service, jury duty, andholidays. Compensation policies are usually written by the HR or compensation
manager in conjunction with senior management.8
ernal equity Employees
ceives his or her pay as fair
en the pay rates in other
anizations.
ernal equity Employees perceives
or her pay as fair given the pay
es of others in the organization.
Equity and Its Impact on Pay Rates
A crucial factor in determining pay rates is the need for equity, specifically external
equity and internal equity. Research has indicated that employee perceptions
of fairness are one of the two key conditions for effective reward programs.9
Externally, pay must compare favourably with rates in other organizations or
an employer will find it hard to attract and retain qualified employees. Pay rates
must also be equitable internally: Each employee should view his or her pay asequitable given other pay rates in the organization.
ESTABLISHING PAY RATESIn practice, the process of establishing pay rates that are both externally and
internally equitable requires three stages:
1. Determine the worth of jobs within the organization through job evaluation
(to ensure internal equity), and group jobs with similar worth into pay grades.
2. Conduct a wage/salary survey of what other employers are paying for com-
parable jobs (to ensure external equity).
3. Combine the job evaluation (internal) and salary' survey (external) informa-
tion to determine pay rates for the jobs in the organization.
Each of these stages will be explained in turn.
RPC
evaluation A systematic
mparison to determine the
ative worth of jobs within a firm.
Stage 1: Job Evaluation
Job evaluation is aimed at determining a jobs relative worth. It is a formal
and systematic comparison of jobs within a firm to determine the worth
of one job relative to another, and it eventually results in a job hierarchy.
Ensures accurate and timely
delivery of pay
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0 Part 4 Total Rewards
nchmark job Ajob that is
tical to the firm's operations or
at is commonly found in other
ganizations.
mpensable factor A fundamental,
mpensable element of a job. such
skill, effort, responsibility, and
orking conditions.
b evaluation committee
diverse group (including
mployees, HR staff, managers,
d union representatives)
ablished to ensure the fair and
mprehensive representation of
e nature and requirements of the
bs in question.
The basic procedure is to compare the content of jobs in relation to one
another, for example, in terms of their effort, responsibility, skills, and work-
ing conditions. Job evaluation usually focuses on benchmark jobs that are
critical to the firms operations or that are commonly found in other organi-
zations. Rohm and Haas, a multinational chemical company, ensures that its
benchmark jobs represent all the various business units and departments in the
organization, are drawn from all levels of the organization, have large numbersof incumbents, are clear and well known in the industry, are stable and easily
understood in terms of purpose and work content, and are visible and well
understood by all employees.10 The resulting evaluations of benchmark jobs
are used as reference points around which other jobs are arranged in order of
relative worth.
Compensable Factors
Jobs can be compared intuitively by deciding that one job is more important or
of greater value or worth than another without digging any deeper into why in
terms of specific j obrelated factors. This approach, called the ranking method, is
hard to defend to employees or others who may not agree with the resulting jobhierarchy. As an alternative, jobs can be compared by focusing on certain basic
factors that they have in common. In compensation management, these basic
factors are called compensable factors. They are the factors that determine the
definition of job content, establish how the jobs compare with one another, and
set the compensation paid for each job.
Some employers develop their own compensable factors. However, most
use factors that have been popularized by packaged job evaluation systems or
by legislation. For example, most of the pay equity acts in Canada focus on
four compensable factors: skill, effort, responsibility, and working conditions.
As another example, the job evaluation method popularized by the Hay
Group consulting firm focuses on four compensable factors: know-how,problem solving, accountability, and working conditions. Often, different job
evaluation systems are used for different departments, employee groups, or
business units.
Identifying compensable factors plays a pivotal role in job evaluation. All
jobs in each employee group, department, or business unit are evaluated using
the same compensable factors. An employer thus evaluates the same elemental
components for each job within the work group and is then better able to com-
pare jobsfor example, in terms of the degree of skill, effort, responsibility, and
working conditions present in each.11
Job Evaluation CommitteeJob evaluation is largely a judgmental process and one that demands close coop-
eration among supervisors, compensation specialists, and the employees and
their union representatives. The main steps involved include identifying the need
for the program, getting cooperation, and choosing an evaluation committee; the
committee then carries out the actual job evaluation.12
A job evaluation committee is established to ensure the representation of
the points of view of various people who are familiar with the jobs in question,
each of whom may have a different perspective regarding the nature of the
jobs. The committee may include employees, HR staff, managers, and unionrepresentatives.
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Chapter 11 Strategic Pay Plans 301
ejob evaluation committee typically
d has the important task of evaluati
mpensable factors.
includes several employees
ng the worth of eachjob using
ips!FOR THE FRONT LINEssification/grading method A
ethod for categorizing jobs into
oups.
sses Groups of jobs based on a
t of rules for each class, such as
mount of independent judgment,
ll, physical effort, and so forth.
asses usually contain similar
bssuch as all secretaries.
ades Groups of jobs based on a
t of rules for each grade, where
bs are similar in difficulty but
herwise different. Grades often
ntain dissimilar jobs, such
secretaries, mechanics, and
efighters.
ade/group description A written
scription of the level of compen
ble factors required byjobs in
ch grade; sed to combine similar
bs into grades or classes.
The evaluation committee first identifies 10 or 15
key benchmark jobs. These will be the first jobs to be
evaluated and will serve as the anchors or benchmarks
against which the relative importance or value of all
other jobs can be compared. Then the committee turns
to its most important functionactually evaluating
the worth of each job. For this, the committee willprobably use either the job classification method or
the point method.
Classification Method
The classification/grading method involves catego-
rizing jobs into groups. The groups are called classes
if they contain similar jobs or grades if they con-
tain jobs that are similar in difficulty but otherwise
different.
This method is widely used in the public sector. The federal governments
UT (University Teaching) job group is an example of a job class because it con-tains similar jobs involving reaching, research, and consulting. Conversely, the
AV (Audit, Commerce, and Purchasing) job group is an example of a job grade
because it contains dissimilar jobs, involving auditing, economic development
consulting, and purchasing.
There are several ways in which to categorize jobs. One is to draw up class
descriptions (similar to job descriptions) and place jobs into classes based on
their correspondence to these descriptions. Another is to draw up a set of clas-
sifying rules for each class (for instance, the amount of independent judgment,
skill, physical effort, and so on that the class of jobs requires). Then the jobs are
categorized according to these rules.
The usual procedure is to choose compensable factors and then develop class
or grade descriptions that describe each class in terms of the amount or level of
compensable factor(s) in jobs. The federal governments classification system, for
example, employs different compensable factors for various job groups. Based on
these compensable factors, a grade/group description (like that in Figure 11.3)
is written. Then, the evaluation committee reviews all job descriptions and slots
eachjob into its appropriate class or grade.
The job classification method has several advantages. The main one is that
most employers usually end up classifying jobs anyway, regardless of the job
evaluation method that they use. They do this to avoid having to work with and
develop pay rates for an unmanageable number of jobs; with the job classifica-
tion method, all jobs are already grouped into several classes. The disadvantages
are that it is difficult to write the class or grade descriptions and that consider-able judgment is required in applying them. Yet many employers use this method
with success.
int method Ajob evaluation
ethod in which a number of
mpensable factors are identi
d. the degree to which each of
ese factors is present in the job
determined, and an overall point
ue is calculated.
Point Method
The point method is widely used in the private sector and requires identifying
several compensable factors. The extent or degree to which each factor is present
in the job is evaluated, a corresponding number of points is assigned for each
factor, and the number of points for each factor is summed to arrive at an overallpoint value for the job.
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2 Part 4 Total Rewards
Example oj a Group Definition in the Federal Government
Correctional Services (CX) Croup Definition
The Correctional Services Croup comprises positions that are primarily involved in the custody, control and correctional influence of inmates in
the institutions of Correctional Service Canada and the training of staff engaged in custodial and correctional work at a Staff College of
Correctional Service Canada.
Inclusions
Notwithstanding the generality of the foregoing, for greater certainty, it includes positions that have as their primaiy purpose, responsibility for
one or more of the following activities:
1. the custody and control of inmates and the security of the institution;
2. the custody and control of detainees being held under Immigration and Refugee Protection Act (IRPA)Security Certificates;
3. the correctional influence of inmates with the continuing responsibility to relate actively and effectively to inmates;
4. the admission and discharge of inmates, and the control of inmate visits and correspondence;
5. the organization and implementation of recreational activities, the surveillance and control of inmates engaged in theseactivities and the
custody and issue of recreational equipment;
6. the training of staff in custodial and correctional procedures and techniques; and
7. the leadership of any of the above activities.
Exclusions
Positions excluded from the Correctional Services Group are those whose primary purpose is included in the definition of any other group or
those in which one or more of the following activities is of primary importance:1. the operation of heating plant, sewage facilities and water supplies and the provision of maintenance services;
2. the provision of patient care that requires the application of a comprehensive knowledge of or specialized expertise in physical and mental
health care;
3. the provision of services and supplies to inmates; and
4. the instruction of inmates in workshops, crafts and training programs.
urce:Correctional Services (CX) Classification Standard, www.tbs-sct.gc.ca/cla/def/cx-eng.asp, Treasury Beard of Canada Secretariat. 2004.produced with the permission of the Minister of Public Works and Government Services Canada. 2012.
IGURE 11.3
1. Preliminary steps. To use the point method, it is necessary to have currentjob descriptions and job specifications based on a thorough job analysis. The
foundation of thejob evaluation plan is a number of compensable factors that
must be agreed upon. In Canada, four compensable factors are commonly
used: skill, effort, responsibility, and working conditions. These factors are
general and can mean different things in different workplaces. Therefore sub-factors of each one may also be determined to clarify the specific meaning of
each factor, as shown below.
Factor
Skill
Effort
Responsibility
Working Conditions
Sub-Factors
Education and Experience
Interpersonal Skill
Physical Effort
Mental Effort
Supervision of Others Planning
Physical Environment Travel
Each subfactor must be carefully defined to ensure that the evaluation commit-
tee members will apply them consistently. An example of a subfactor definition
is presented in Figure 11.4.
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Chapter 11 Strategic Pay Plans 303
Sub-Factor Definition
Responsibility for Others
This sub-factor is used to measure the responsibility that the incumbent of the position assumes for
the direction and/or supervision of volunteers, external suppliers/contractors and staff. The following
characteristics of the work are to be considered in selecting a level: the nature of supervision given, based
either on accountability for results or functional guidance (how-to), and the number of employees or
others directed/supervised. Occasional supervision, such as that performed during the absence of thesupervisor on vacation or sick leaves, is not to be considered. This sub-factor does NOT include the
academic supervision of students or the activities of others outside of an employee-type
relationship.
IGURE 11 .4-
urce:Based on McMaster University CAW Local 555 Job Evaluation Plan,www.workingatmcmaster.ca/jjesccessed March 23, 2009).
Determine factor weights and degrees. The next step is to decide on the
maximum number of points (called weight) to assign to each factor.
Assigning factor weights is generally done by the evaluation committee. The
committee members carefully study each factor and determine the relativevalue of the factors. For example:
Skill
Effort
Responsibility
Working conditions
30 percent
30 percent
30 percent
10 percent
= 100 percent
hen definitions of varying amounts (called degrees or levels) of each
bfactor (or overall factor if no subfactors are used) are prepared so thatters can judge the degree of a subfactor/factor existing in a job. Thus, sub-
ctor physical environment for the factor working conditions might have
ree degreesoccasional, frequent, continuousdefined as follows:
Degree 1: Occasionalless than 30 percent of the time on an annual basis.
Typically occurs once in a while, but not every day, or every day for less than
30 percent of the day.
Degree 2: Frequent30 percent to 60 percent of the time on an annual
basis. A regular feature of the job that occurs during any given day, week,
or season.
Degree 3: ContinuousMore than 60 percent of the time on an annualbasis. Typically occurs for most of the regular work day, all year round (on
average).
he number of degrees usually does not exceed five or six, and the actual num-
r depends mostly on judgment. It is not necessary to have the same number of
grees for each factor, and degrees should be limited to the number necessary
distinguish among jobs.
Assign points for each degree of each sub-factor. Points are then assigned to
each factor, as in Table 11.1. For example, suppose that it is decided to use a
total number of 1 000 points in the point plan. Then, since the factor skill
had a weight of 30 percent, it would be assigned a total of 30 percent of
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4 Part 4 Total Rewards
Point Method Job Evaluation Plan
1 000 = 300 points. This automatically means that the highest degree for each
subfactor of the skill factor would be 300 points. Points are then assigned
to the other degrees for this factor, in equal amounts from the lowest to
the highest degree. This step is repeated for each factor and its subfactors,
resulting in the final job evaluation plan, as shown in Table 11.1. All these
decisions are recorded in ajob evaluation manual to be used by the job evalu-
ation committee.
4. Evaluate the jobs. Once the manual is complete, the actual evaluations can
begin. Each job is evaluated factor by factor to determine the number of
points that should be assigned to it. First, committee members determine the
degree (first degree, second degree, and so on) to which each factor is present
in thejob. Then they note the corresponding points (see Table 11.1) that were
assigned to each of these degrees. Finally, they add up the points for all fac-
tors, arriving at a total point value for the job. Raters generally start by rating
benchmark jobs and obtaining consensus on these, and then they rate the rest
of thejobs.
Point systems involve a quantitative technique that is easily explained to and
used by employees. Flowever, it can be difficult and timeconsuming to develop
a point plan and to effectively train the job evaluation user group. This is one
reason why many organizations adopt a point plan developed and marketed
by a consulting firm. In fact, the availability of a number of readymade plans
probably accounts in part for the wide use of point plans injob evaluation.
If the committee assigned pay rates to each individual job, it would be dif-
ficult to administer since there might be different pay rates for hundreds or even
thousands of jobs. Even in smaller organizations there is a tendency to try to
simplify wage and salary structures as much as possible. Therefore, the commit-
tee will probably want to group similar jobs (in terms of their number of points,
for instance) into grades for pay purposes. Then, instead of having to deal with
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Chapter 11 Strategic Pay Plans 305
y grade Comprises jobs of
proximately equal value.
ge/salary survey A survey
med at determining prevailing
ge rates. A good salary survey
ovides specific wage rates for
mparable jobs. Formal written
estionnaire surveys are the most
mprehensive.
pay rates for hundreds of jobs, it might only have to focus on pay rates for 10
or 12 groupings ofjobs.
A pay grade comprises jobs of approximately equal value or importance,
as determined by job evaluation. If the point method was used, the pay grade
consists of jobs falling within a range of points. If the classification system
was used, then the jobs are already categorized into classes or grades. The
next stage is to obtain information on market pay rates by conducting a wage/salary survey.
Stage 2: Conduct a Wage/Salary Survey
Compensation or wage/salary surveys play a central role in determining pay
rates for jobs.13 An employer may use wage/salary surveys in three ways. First,
survey data are used to determine pay rates for benchmark jobs that serve as
reference points or anchors for the employers pay scale, meaning that other jobs
are then paid based on their relative worth compared to the benchmark jobs.
Second, an increasing number of positions are paid solely based on the market-
place (rather than relative to the firms benchmark jobs).14As a result of the current shift away from longterm employment,
compensation is increasingly shaped by market wages and less by how it fits
into the hierarchy of jobs in one organization. Finally, surveys also collect data
on employee benefits, worklife programs, payforperformance plans, recogni-
tion plans, and so on to provide a basis on which to make decisions regarding
other types of rewards.
Formal and Informal Surveys by the Employer
Most employers rely heavily on formal or informal surveys of what other employ-
ers are paying.15 Informal telephone surveys are good for collecting data on a
relatively small number of easily identified and quickly recognized jobs, suchas when a banks HR director wants to determine the salary at which a newly
opened customer service representatives job should be advertised. Informal dis-
cussions among human resources specialists at regular professional association
meetings are other occasions for informal salary surveys. Some employers use
formal questionnaire surveys to collect compensation information from otheremployers, including things like number of employees, overtime policies, starting
salaries, and paid vacations.
Commercial, Professional, and Government Salary Surveys
Many employers also rely on surveys published by various commercial firms,
professional associations, or government agencies. For example, Statistics
Canada provides monthly data on earnings by geographic area, by industry, and
by occupation. Table 11.2 provides an example of earnings data by industry and
occupation.
The Toronto Board of Trade conducts five compensation surveys annually,
covering executive; management; professional, supervisory, and sales; informa-
tion technology; and administrative and support positions. The surveys include
information from small, medium, and large employers in the Greater Toronto
Area. A separate survey of employee benefits and employment practices is alsoconducted.
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6 Part 4 Total Rewards
Average Weekly Earnings by industry 20042009
ography=Canada
pe of employees=AII employees
vertime=lncluding overtime
onster.ca Salary & Benefits Centre
tp://career-advice.monster.ca/
ary-Benefits/careers, asp*
Private consulting or executive recruiting companies, such as Towers
Watson, Mercer, and Hewitt Associates, annually publish data covering the
compensation of senior and middle managers and members of boards of direc-
tors. Professional organizations, such as the Certified General Accountants and
Professional Engineers Ontario, conduct surveys of compensation practices
among members of their associations.
For some jobs, salaries are determined directly based on formal or informal
salary' surveys like those available from Monster.ca. In most cases, though, sur-
veys are used to price benchmark jobs around which other jobs are then slotted
based on their relative worth as determined through job evaluation.
Monitors the competitiveness
of the compensation program
elative to comparable
organizations
Salary Survey Interpretation and Use
Data from the Hay Group consulting firm indicate that large organizations par-
ticipate in an average of 11 compensation surveys and use information from
seven of them to administer their own compensation practices.16
Upward bias can be a problem regardless of the type of compensation survey
used. At least one compensation expert argues that the way in which most
surveys are constructed, interpreted, and used leads almost invariably to a situ-
ation in which firms set higher wages than they otherwise might. For example,
companies like to compare themselves against wellregarded, highpaying, and
highperforming companies, so baseline salaries tend to be biased upward.
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Chapter 11 Strategic Pay Plans 307
ips FOR THE FRONTLINE
Recommends job price and pay
anges based on relevant internal
nd external factors
ge curve A graphic description
he relationship between the
ue of thejob and the average
ge paid for thisjob.
Stage 3: Combine the Job Evaluation and Salary
Surv ey Information to Determine Pay for JobsThe final stage is to assign pay rates to each pay grade. (Of course, if jobs were
not grouped into pay grades, individual pay rates would have to be assigned
to each job.) Assigning pay rates to each pay grade (or to each job) is usually
accomplished with a wage curvc.
The wage curve graphically depicts the market pay rates currently being
paid for jobs in each pay grade, relative to the job evaluation points for each
job or grade. An example of a wage curve is presented in Figure 11.5. Note
that pay rates are shown on the vertical axis, while the points for pay grades
are shown along the horizontal axis. The purpose of the wage curve is to show
the relationship between the value of the job as determined by one of the job
evaluation methods and the current average pay rates for eachjob or grade.
Plotting a Wage Curve
Similarly, companies that sponsor surveys often do so with an implicit (albeit
unstated) objective: to show the company [is] paying either competitively or
somewhat below the market, so as to justify positive corrective action. For these
and similar reasons, it is probably wise to review survey results with a skeptical eye
and to acknowledge that upward bias may exist and should perhaps be
considered when making decisions.1'
Whatever the source of the survey, the data must be carefully assessed foraccuracy before they are used to make compensation decisions. Problems can arise
when the organizations job descriptions only partially match the descriptions
contained in the survey, the survey data were collected several months before
the time of use, the participants in the survey do not represent the appropriate
labour market for thejobs being matched, and so on.18
Now all the information necessary to move to the next stagedetermining
pay for jobshas been obtained.
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8 Part 4 Total Rewards
An Ethical!Dilemmahat should employers do when there is a shortage of a certain
pe of skill and they cannot attract any workers unless they pay
market rate above the maximum of their salary range for that
b? How should other jobs (without a skills shortage) in the
me company in the same salary range be paid?
ranges A series of steps or
els within a pay grade, usually
ed on years of service.
adbanding Reducing the
mber of salary grades and
ges into just a few wide levels
bands," each of which then
tains a relatively wide range of
s and salary levels.
There are several steps in determining pay for pay
grades using a wage curve. First, find the average pay
for each pay grade, since each of the pay grades consists
of several jobs. Next, plot the pay rates for each pay
grade, as was done in Figure 11.5. Then fit a line (called
a wage line) through the points just plotted. This can
be done either freehand or by using a statistical methodknown as regression analysis. Finally, determine pay
for jobs. Wages along the wage line are the target wages or salary rates for
the jobs in each pay grade.
Developing Rate Ranges
Most employers do not just pay one rate for all jobs in a particular pay grade.
Instead, they develop pay ranges for each grade so that there might, for instance,
be 10 levels or steps and 10 corresponding pay rates within each pay grade.
This approach is illustrated in Table 11.3, which shows the pay rates and levels
for some of the federal government pay grades. As of the time of this pay sched-
ule, for instance, employees in positions that were classified in grade CX1 couldbe paid annual salaries between $52 604 and $66 413, depending on the level at
which they were hired into the grade, the amount of time they were in the grade,
and their merit increases (if any). Another way to depict the rate ranges for each
grade is with a wage structure, as in Figure 11.6. The wage structure graphically
depicts the range of pay rates (in this case, per hour) to be paid for each grade.
The use of pay ranges for each pay grade has several benefits. First, the
employer can take a more flexible stance with respect to the labour market;
for example, some flexibility makes it easier to attract experienced, higherpaid
employees into a pay grade where the starting salary for the lowest step may be
too low to attract such experienced people. Pay ranges also allow employers to
provide for performance differences between employees within the same gradeor between those with differing seniority. As in Figure 11.6, most employers
structure their pay ranges to overlap a bit so that an employee with greater expe-
rience or seniority may earn more than an entrylevel person in the next higher
pay grade.
Broadbanding
The trend today is for employers to reduce their salary grades and ranges
from 10 or more down to three to five, a process that is called broadbanding.
Broadbanding means combining salary grades and ranges intojust a few wide
Federal Government Pay Schedules CX-1 and CX-2
ate Levels within Grade
rade 1 2 3 4 5
CX-1 $52 604 55 761 59 107 62 652 66 413
CX-2 $55 826 59 176 62 726 66 489 70 477
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Chapter 11 Strategic Pay Plans 309
vels or bands, each of which then contains a relatively wide range of jobs
nd salary levels (see Figure 11.7).
Broadbanding a pay system involves several steps. First, the number of
ands is decided on and each is assigned a salary range. The bands usually have
ide salary ranges and also overlap substantially. As a result, there is much
ore flexibility to move employees from job to job within bands and less need
promote them to new grades just to give them higher salaries.
Broadbandings basic advantage is that it injects greater flexibility into
mployee compensation.19 The new, broad salary bands can include both
upervisors and those reporting to them. Broadbanding also facilitates lesspecialized, boundaryless jobs and organizations. Less specialization and more
articipation in crossdepartmental processes generally mean enlarged duties or
apabilities and more possibilities for alternative career tracks.
orrecting OutofLine Rates
he actual wage rate for a j ob may fall well off the wage line or well outside the
te range for its grade. This means that the average pay for that job is currently
o high or too low relative to other jobs in the firm. If a point falls well below
he line, a pay raise for the job may be required. If the plot falls well above the
age line, pay cuts or a pay freeze may be required.
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0 Part 4 Total Rewards
FIGURE 11.7 Broadband ing
6215928 Louisa Litt
Band C
Band I
12 pay grades reduced to
3 broad bands
Band A
job evaluation points
iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiniii
nsures pay records are accurate
nd complete
d circle pay rate A rate of
y that is above the pay range
aximum.
Underpaid employees should have their wages raised to the minimum of the
rate range for their pay grade, assuming that the organization wants to retain
the employees and has the funds. This can be done either immediately or in one
or two steps.
Pay rates of overpaid employees are often called red circle pay rates, and
there are several ways to cope with this problem. One is to freeze the rate paid
to employees in this grade until general salary increases bring the other jobs into
line with it. A second alternative is to transfer or promote some or all of the
employees involved to jobs for which they can legitimately be paid their current
pay rates. The third alternative is to freeze the rate for six months, during which
time attempts are made to transfer or promote the overpaid employees. If this is
not possible, then the rate at which these employees are paid is cut to the maxi-
mum in the pay range for their grade.
PAY FOR KNOWLEDGEPayforknowledge systems are known as competency-based pay (for man-
agement and professional employees) and skill-based pay (for manufacturing
employees). These plans pay employees for the range, depth, and types of knowl-
edge that they are capable of using, rather than for the job that they currently
hold. Competencies are individual knowledge, skills, and behaviours that are
critical to successful individual or corporate performance based on their relation
to the organizations visions, values, and business strategy.Core competencies describe knowledge and behaviours that employees
throughout the organization must exhibit for the organization to succeed, such as
customer service orientation for all hotel employees. Functional competencies
are associated with a particular organizational function, such as negotia-
tion skills for salespeople, or safety orientation for pilots. Behavioural
competencies are expected behaviours, such as always walking a customer to
the product they are looking for rather than pointing.21 A payforknowledge
program should include the following:
ips FOR THE FRONT LINECompetencies and skillsdirectly important to job performancethat can
be defined in measurable and objective terms. Skills tend to be easier to define
and measure than competencies.
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Chapter 11 Strategic Pay Plans 311
nstruction workers today are often
mpensated for their work through the
ethod of skill-based pay.
New and different competencies that replace obsolete competencies
or competencies that are no longer important to job performance. If
additional competencies are needed, the obsolete competency should
be removed from the program.
Onthejob training, not in the classroom training. Those who
possess the competencies or skills should teach them. Also include
onthejob assessment, which can be supplemented by paperandpencil exams administered on thejob.22
As an example, in a manufacturing plant setting, workers would be paid
based on their attained skill levels. In a threelevel plan:
1. Level 1 would indicate limited ability', such as knowledge of basic
facts and ability to perform simple tasks without direction.
2. Level 2 would mean that the employee has attained partial proficiency
and could, for instance, apply technical principles on thejob.
3. Level 3 would mean that the employee is fully competent in the area
and could, for example, analyze and solve production problems.
Increased workforce flexibility is one of the most significant advan-
tages of pay for knowledge. Employees rotate between differentjobs
or production areas to encourage the learning of new competencies
and skills. This process fosters flexibility by encouraging workers to learn
multiple competencies and skills and to willingly switch tasks.23
Experience has shown that competencybased pay is more efficient in the first
years of its existence. The greatest challenge is measurement of competencies.
As time goes on, employees often become dissatisfied if these measurements are
not valid or if the people responsible for assessing competencies are considered
incompetent or biased.24
Another major employee concern is that pay be linked sufficiently to
performance as well as competencies. Some compensation consultants suggest
that firms should not pay for competencies at the exclusion of rewards for high
performance results. For example, competencies could be linked to the determi-
nation of base salary combined with bonuses that are based on performance.25
One final issue for many Canadian companies is that payforknowledge systems
do not meet pay equity requirements.26
Although only about 15 to 20 percent of workplaces use pay for knowl-
edge at present, experts predict that the viewpoint that people, rather than
jobs, provide advantages to organizations will continue to grow in popularity.
They foresee the emergence of new pay systems combining competencies and
market values7
PAY FOR EXECUTIVE, MANAGERIAL, ANDPROFESSIONAL JOBS
Developing a compensation plan to pay executive, managerial, and professional
employees is similar in many respects to developing a plan for other employees.28
The basic aims of the plan are the same in that the goal is to attract good employ-
ees and maintain their commitment. Yet for executive, managerial, and profes-
sional jobs, job evaluation provides only a partial answer to the question of
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2 Part 4 Total Rewards
how to pay these employees. Executives, managers, and professionals are almost
always paid based on their performance as well as on the basis of static job
demands, like working conditions.
An Ethical!Dilemmait right that CEOs earn enormous amounts of money when
st employees are getting small increases each year (some
es even less than inflation)?
Research! INSIGHT
Compensating Executives and Managers
There are five elements in an executive/managerial compensation package:salary, benefits, shortterm incentives, longterm incentives, and perquisites.29
The amount of salary paid usually depends on the value of the persons work to
the organization and how well the person is honouring his or her responsibilities.
Salary is the cornerstone of executive compensation, because it is the element
on which the others are layered, with benefits, incentives, and perquisites often
awarded in some proportion to base pay.
Executive compensation tends to emphasize perfor-
mance incentives more than other employee pay plans
do, since organizational results are likely to reflect the
contributions of executives more directly than those
of other employees. The heavy incentive component ofexecutive compensation can be illustrated by using some
of Canadas bestpaid executives as an example.30 The
highest paid executive in Canada in 2010 was Hank Swartout, CEO of Precision
Drilling Corporation, who earned a total compensation of $74 824 331, of
which $840 000 was base salary. Hunter Harrison, CEO of Canadian National
Railway, received total compensation of $56 219 494, which included his base
salary of $1 665 950. A study on CEO pay determined that firm size accounts for
40 percent of the variance of total CEO pay, while firm performance accounts
for less than 5 percent of the variance.31
There has been considerable debate regarding whether top executives are
worth what they are paid. Some argue that the job of an executive is increas-ingly difficult. The stakes are high, and job tenure is often short. Expectations
are getting higher, the questions from shareholders are more direct, and the
challenge of navigating an organization through difficult economic times
has never been so great. However, shareholder activism regarding executive
pay has attempted to tighten the restrictions on what firms pay their top
executives.
Some believe that pay for performance is taking hold, with companies now
making stronger links between company performance and CEO total compen-
sation. Others believe that linking pay to performance is still inadequate in the
majority of companies. Most agree that better disclosure of executive pay is
required, and groups such as the Canadian Securities Administrators and the
Canadian Coalition for Good Governance are pressing for dramatic changes in
executive compensation disclosure.32
Compensating Professional Employees
Compensating nonsupervisory professional employees, like engineers and
scientists, presents unique problems. Analytical jobs require creativity and prob-
lem solving, compensable factors not easily compared or measured. Furthermore,
the professionals economic impact on the firm is often related only indirectly
to the persons actual efforts; for example, the success of an engineers inventiondepends on many factors, like how well it is produced and marketed.
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Chapter 11 Strategic Pay Plans 313
PAY EQUITY
y equity Providing equal pay to
ale-dominated job classes and
male-dominated job classes of
ual value to the employer.
In theory, the job evaluation methods explained previously can be used for
evaluating professional jobs.33 The compensable factors here tend to focus on
problem solving, creativity, job scope, and technical knowledge and expertise.
The job classification method is commonly useda series of grade descrip-
tions are written, and each position is slotted into the grade having the most
appropriate definition.
hi practice, traditional methods of job evaluation are rarely used for profes-sional jobs since it is so difficult to identify compensable factors and degrees of
factors that meaningfully capture the value of professional work. Knowledge
and the skill of applying it, as one expert notes, are extremely difficult to
quantify and measure.34
As a result, most employers use a market-pricing approach in evaluating
professional jobs. They price professional jobs in the marketplace to the best
of their ability to establish the values for benchmark jobs. These benchmark
jobs and the employers other professional jobs are then slotted into a salary
structure. Specifically, each professional discipline (like mechanical engineer-
ing or electrical engineering) usually ends up having four to six grade levels,
each of which requires a fairly broad salary range. This approach helps ensurethat the employer remains competitive when bidding for professionals whose
attainments vary widely and whose potential employers are found literally
worldwide.
Historically, the average pay for Canadian women has been considerably
lower than that for men. In 1967, womens average wages were 46.1 percent
of mens average wages. Table 1 1.4 shows the most recent wage gap
statistics. Some of this gap is due to the fact that women do more parttimework than men, but even when fullyear, fulltime workers are compared,
the gap has stalled at approximately 30 percent since 1998 (see Workforce
Diversity box). The wage gap is narrower for single women over those
who are married, and for younger women when compared to those who
are older.
Moreover, the gap persists even when women have the same qualifica-
tions and do the same type of work as men. A 2004 study showed that, two
years after graduation, female university graduates in the Maritime provinces
working full time earned 78 percent of the weekly wage of males, even after
accounting for differences in field of study, occupation, location, and hours
worked.37
Although such factors as differences in hours worked, experience levels,
education levels, and level of unionization contribute to the wage gap, systemic
discrimination is also present. The purpose of pay equity legislation is to
redress systemic gender discrimination in compensation for work performed
by employees in femaledominated job classes. Pay equity requires that equal
wages be paid for jobs of equal value or worth to the employer, as deter-
mined by genderneutral (i.e., free of any bias based on gender) job evaluation
techniques.
The legal process involved can be lengthy. A final decision is still pend-
ing in a pay equity complaint filed against Canada Post in 1983 claiming that6 000 clerical workers had been subjected to systemic discrimination.19In 2006,
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4 Part 4 Total Rewards
Male-Female Average Earnings Ratio* for Fuli-Year, Full-Time Workers, 1998-2008
ography=Canada
ork activity=Full-year full-time workers
rnings stated in constant year 2006 dollars.
urce:Statistics Canada, CANSIM Table 202-0102,http://estatstatcan.gc.ca/cgi-win/CNSMCGI.EXE(accessed August 20, 2011).
D I V E R S I T Y
Women Work for Free as of September 17
For women in Ontario, the middle of September means
more than the end of summer. It is a stark reminder
of the gender pay gap that persists in the province. As
of September 17, the year is 71 percent of the way
through, and with women in Ontario earning an average
of 71 cents for every dollar men earn, it also marks
the day women start working for free, according to the
Equal Pay Coalition.
With an overall 29 percent gender pay gap, women
are effectively denied their fair pay from September 17
until the end of the year while men get their full pay,
states the coalition. Ontarios Pay Equity Act, which
turned 20 years old in 2008, was supposed to end this
devaluation by requiring employers to pay womens and
men's jobs the same when they were of comparable
value. The pay gap has decreased from 38 percent in
1988 to 29 percent today, but that is still too high,
according to the coalition.
Canada ranks seventeenth among 22 Organisation for
Economic Co-operation and Development countries and
is behind the United States, which has a 23 percent
wage gap. The World Economic Forums 2007 Global
Gender Gap Report highlighted the key role gender "remu
neration gaps play in preventing economies from real
izing their full potential. Businesses, communities, and
governments all benefit from pay equity enforcement.
Discriminatory pay affects women throughout their
lives, beginning with their first jobs and continuing into
retirement. Young women graduating from high school
earn 27 percent less than male high school graduates;
young women graduating from university earn 16 percent
pay gap widens as their
careers progress. The median income of retired women
is almost half that of retired men. Over a lifetime these
pay gaps add up to enormous financial losses for work
ing women, estimating the total for each woman to be
between US$700 000 and US$2 million, depending on
education level.
Source: Adapted from Women Work for Free as of Sept. 17,
Canadian HR Reporter (September 18, 2008 J; and M. Cornish,
Much Work to Be Done on Pay Equity, Canadian HR Reporter
(February 28, 2008). Reprinted by permission of Canadian HR
Reporter. Copyright Thomson Reuters Canada Ltd., (2012)
Toronto, Ontario, 18003875164.Web: www.hrreporter.com
WORKFORCE
ABLE 11.4
http://estatstatcan.gc.ca/cgi-win/CNSMCGI.EXEhttp://estatstatcan.gc.ca/cgi-win/CNSMCGI.EXEhttp://www.hrreporter.com/http://www.hrreporter.com/http://estatstatcan.gc.ca/cgi-win/CNSMCGI.EXE -
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Chapter 11 Strategic Pay Plans 315
the Supreme Court of Canada ruled against a Canadian
Human Rights Tribunal decision that female Air Canada
flight attendants jobs could not be compared with those
of mainly male mechanics and pilots and sent the case
back to the tribunal. The court condemned Air Canadas
use of legal technicalities to delay the case, which began
in 1991.40Six provinces (Ontario, Quebec, Manitoba, Nova
Scotia, New Brunswick, and Prince Edward Island) have
created separate proactive legislation that specifically
requires that pay equity be achieved. Ontario and Quebec
require pay equity in both the public and the private sec-
tors, whereas the legislation in the other four provinces
skatchewan workers demonstrate for pay equity. applies only to the public sector. In the federaljurisdictionand the Yukon (public sector only), human rights legisla-
tion requires equal pay for work of equal value.
The wage gap has narrowed since the introduction of pay equity legislation,
but there is still no explanation other than systemic discrimination for muchof the 30 percent gap that still persists.41 In the long term, the best way to
remove the portion of the wage gap resulting from systemic discrimination is to
eliminate male and femaledominated jobs by ensuring that women have equal
access to and are equally represented in all jobs.
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316 Part 4 Total Rewards
Chapter
1. A total rewards approach considers individual
reward components as part of an integrated
whole to determine the best mix of rewards that
are aligned with business strategy and provide
employee value, all within the cost constraints
of the organization. Alignment is the extent
to which rewards support outcomes that are
important to achieving the organizations stra-
tegic objectives. For example, when competitive
advantage relies on relentless customer service,
th is behaviour should be reinforced. Employee
value is created when rewards are meaningful to
employees and influence their affiliation with the
organization.
2. Establishing pay rates involves three stages: job
evaluation (to ensure internal equity), conducting
wage/salary surveys (to ensure external equity),
and combining job evaluation and salary survey
results to determine pay rates.Job evaluation is
aimed at determining the relative worth of jobs
within a firm. It comparesjobs with one another
based on their content, which is usually defined
in terms of compensable factors, such as skill,
effort, responsibility, and working conditions.
Jobs of approximately equal value are combined
into pay grades for pay purposes. Salary surveys
collect data from other employers in the mar-
ketplace who are competing for employees in
similar kinds of positions. The wage curve shows
the average market wage for each pay grade (or
job). It illustrates what the average wage for each
grade should be and whether any present wages
or salaries are out of line.
3. Competencybased pay plans provide employee
compensation based on the skills and knowledge
that they are capable of using, rather than the job
that they currently' hold.
4. The five basic elements of compensation for man-
agers are salary', benefits, shortterm incentives,
longterm incentives, and perquisites.
5. Pay equity is intended to redress systemic gender
discrimination as measured by the wage gap,which indicates that fulltime working women
in Canada make about 71 cents for every dol-
lar made by fulltime working men. Pay equity
requires equal pay for femaledominated jobs of
equal value to maledominated jobs (where value
is determined through job evaluation).
MyManagementLab
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Key TERMS
benchmark job (p. 300)
broadbanding (p. 308)
classes (p. 301)
classification/grading method (p. 301)
compensable factor (p. 300)
external equity (p. 299)
grade/group description (p. 301)
grades (p. 301)
internal equity (p.299)
job evaluation (p. 299)
job evaluation committee (p. 300)
pay equity (p. 313)
pay grade (p. 305)
pay ranges (p. 308)
point method (p. 301)
red circle pay rate (p. 310)
total employment rewards (p. 294)
wage curve (p. 307)
wage/salary survey (p. 305)
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Chapter 11 Strategic Pay Plans 317
Review and Discussion QUESTIONS
What are the five components of total rewards?
Describe what is meant by the termbenchmark job.
Identify and briefly describe the three stages in
establishing pay rates.
What are the pros and cons of the following
methods of job evaluation: ranking, classifica-
tion, factor comparison, point method?
Explain the term competencies and explain the
differences among core, functional, and behav-
ioural competencies.
6. Explain what is meant by the marketpricing
approach in evaluating professional jobs.7. Explain what pay equity legislation is intended
to accomplish, what action is required by the
legislation to accomplish it, and how effective
the legislation has been in accomplishing its
objectives.
Critical Thinking
Do you think that transactional or relationalrewards have more impact on overall organiza-
tional performance?
Why do companies pay for compensation sur-veys where job matching may be difficult rather
than conducting their own surveys?
It was recently reported in the news that the
base pay for Canadian bank CEOs range in the
millions of dollars, and the pay for the governor
of the Bank of Canada is less than half of that of
the lowest paid bank CEO. How do you account
for this difference? Should anything be done
about this? Why or why not?
4. Do you agree with paying people for competen-
cies and skills that they are rarely required to useon the job?
5. What are some of the potential reasons that
genderbased pay discrimination is so hard to
eradicate?
6. Why do you think there is such a discrep-
ancy between the pay rates of executives and
employees? Is this fair? Why or why not?
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318 Part 4 Total Rewards
Experiential EXERCISES
1. Working individually or in groups, conduct
salary surveys for the positions of entrylevel
accountant and entrylevel chemical engineer.
What sources did you use, and what conclusions
did you reach? If you were the HR manager for
a local engineering firm, what would you recom-
mend that each job be paid?
2. Obtain information on the pay grades and rate
ranges for each pay grade at your college or
university. Do they appear to be broadbands? If
not, propose specific broadbands that could be
implemented.
3. You have been asked by the owner of yourmediumsized import and export company
(200+ people) to develop a way to standardize
pay ranges for different jobs in the company.
He says he is tired of employees complaining
about the pay they get compared to others and
is concerned that if he does nothing someone
will complain about inequitable pay practices.
Outline the steps you will follow to do this.
Make sure to give a rationale for the type of job
evaluation system you propose as well as for the
method you suggest to obtain comparable salary
data. Thejobs he is most concerned about are
sales representative
shipping and receiving manager
multilingual contract negotiator
accounts receivable clerk
shipping clerk.
4. You are the HR manager at a large construc-
tion firm headquartered in Edmonton. Most
of the companys administrative staff are also
in Edmonton. You have regional and local siteoffices across the country. Draft a memo to
employees about your companys new pay
forknowledge and skills policy. Make sure
to document at least one fully complete section
on how this policy will be administered.
Your professor may give you some ideas on
what might be considered or you may create
your own circumstances under which pay for
knowledge and skills will be applied.
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Chapter 11 Strategic Pay Plans 319
Running
Running Case: LearnlnMotion.com
The New Pay Plan
LearnIiiMotion.com does not have a formal wage
structure, nor does it have rate ranges or use com-
pensable factors. Jennifer and Pierre base wage
rates almost exclusively on those prevailing in the
surrounding community, and they temper these by
trying to maintain some semblance of equity among
what workers with different responsibilities are paid.
As Jennifer says, Deciding what to pay dotcom
employees is an adventure: Wages for jobs like web
designer and online salesperson are always climbingdramatically, and theres not an awful lot of loyalty'
involved when someone else offers you 30 percent
or 40 percent more than youre currently making.
Jennifer and Pierre are therefore continually scan-
ning various sources to see what others are pay-
ing for positions like theirs. They peruse the want
ads almost every day and conduct informal surveys
among their friends at other dotcoms. Once or twice
a week, they also check compensation websites like
Monster .ca.
Although the company has taken a somewhatunstructured, informal approach to establishing its
compensation plan, the firms actual salary schedule
is guided by several basic pay policies. For one thing,
the difficulty they had recruiting and hiring employ-
ees caused them to pay salaries 10 to 20 percent
above what the market would seem to indicate.
Jennifer and Pierre write this off to the need to
get and keep good employees. As Jennifer says,
If youve got 10 web designers working for you,
you can afford to go a few extra weeks with-out hiring another one, but when you need one
designer and you have none, youve got to do
whatever you can to get that one designer hired.
Their somewhat informal approach has also led
to some potential inequities. For example, the
two salespeopleone a man, the other a woman
are earning different salaries, and the man is making
about 30 percent more. If everything was going
finefor instance, if sales were up and the calen-
dar was functionalperhaps they wouldnt be wor-
ried. However, the fact is that the two owners arewondering if a more structured pay plan would be
a good idea. Now they want you, their management
consultant, to help them decide what to do.
QUESTIONS
1 Describe the total rewards model and its five
components and whether it would benefit
LearnlnMotion.
2 What are some basic considerations in deter-
mining pay rates that LearnlnMotion must be
aware of?
3 Using the three stages of establishing pay rates,
provide recommendations to LearnlnMotion in
regard to job evaluation, wage/salary surveys,
and how to combine the first two steps to
determine pay rates for LearnlnMotions jobs.
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320 Part 4 Total Rewards
Case INCIDENT
Salary Inequities at Acme Manufacturing
Joe Blackenship was trying to figure out what to do
about a problem salary situation that he had in his
plant. Blackenship recently took over as president of
Acme Manufacturing. The founder, Bill George, had
been president for 35 years. The company is family
owned and located in a small eastern Manitoba town.
It has approximately 250 employees and is the largest
employer in the community. Blackenship is a mem-
ber of the family that owns Acme, but he had never
worked for the company prior to becoming president.
He has an MBA and a law degree, plus 15 years ofmanagement experience with a large manufacturing
organization where he was senior vicepresident of
human resources when he made his move to Acme.
A short time after joining Acme, Blackenship
started to notice that there was considerable inequity
in the pay structure for salaried employees. A dis-
cussion with the HR director led him to believe that
salaried employees pay was very much a matter of
individual bargaining with the past president. Hourly
paid factory workers were not part of the problem
because they were unionized and their wages were
set by collective bargaining. An examination of the
salaried payroll showed that there were 25 employ-
ees, whose pay ranged from that of the president to
that of the receptionist. A closer examination showed
that 14 of the salaried employees were female. Three
of these were frontline factory supervisors, and one
was the HR director. The rest were nonmanagement
employees.
This examination also showed that the HR
director appeared to be underpaid and that the three
female supervisors were paid somewhat less than
any of the male supervisors. However, there wereno similar supervisory jobs in which there were both
male and female incumbents. When asked, the HR
director said that she thought the female supervisors
may have been paid at a lower rate mainly becausethey were women, and perhaps George did not think
that women needed as much money because they had
working husbands. However, she added the thought
that they might be paid less because they supervised
lesserskilled employees than did male supervisors.
Blackenship was not sure that this was true.
The company from which Blackenship had moved
had a good job evaluation system. Although he was
thoroughly familiar and capable with this compensa-
tion tool, Blackenship did not have time to create a
job evaluation study at Acme. Therefore, he decided
to hire a compensation consultant from a nearby uni-
versity to help him. Together, they decided that all
25 salaried jobs should be in the same job evaluation
cluster, that a modified ranking system of job evalu-
ation should be used, and that the job descriptions
recently completed by the HR director were current,
accurate, and usable in the study.
The job evaluation showed that there was no evi-
dence of serious inequities or discrimination in the
nonmanagement jobs, but that the HR director and
the three female supervisors were being underpaid
relative to comparable male salaried employees.Blackenship was not sure what to do. He knew
that if the underpaid supervisors took their case to
the local pay equity commission, the company could
be found guilty of sex discrimination and then have to
pay considerable back wages. He was afraid that if he
gave these women an immediate salary increase large
enough to bring them up to where they should be,
the male supervisors would be upset and the female
supervisors might comprehend the total situation and
want back pay. The HR director told Blackenship
that the femalesupervisors had never complainedabout pay differences, and they probably did not
know the law to any extent.
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15928 Louisa Litt
Chapter 11 Strategic Pay Plans 321
The HR director agreed to take a sizable salary
increase with no back pay, so this part of the prob-
lem was solved. Blackenship believed that he had four
choices relative to the female supervisors:
Do nothing.
Increase the female supervisors salaries gradually.
Increase their salaries immediately.
Call the three supervisors into his office, discuss
the situation with them, and jointly decide what
to do.
QUESTIONS
1 What would you do if you were Blackenship?
2 How do you think the company got into a situa-
tion like this in the first place?
3 Why would you suggest that Blackenship pursue
your suggested alternative?
Source: Based on a ease prepared by Professor James C. Hodgctts of
the Fogclman College of Business and Economics at the University
of Memphis. All names arc disguised. Used with permission.
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